IMF drops somber forecasts for Romania's economic growth

International Monetary Fund has transferred yesterday the first installment of the funding package of 5 bln euros, due to be received today by National Bank of Romania. However, IMF’s forecasts for Romania’s economic growth and unemployment rate are getting even bleaker at least for the coming two years.

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"Even with help from the IMF, 2009 and 2010 will be difficult years."

Jeffrey Franks (photo), the IMF’s mission chief for Romania says that even with help from the IMF, 2009 and 2010 will be difficult years, expecting the growth to turn negative this year and near zero next year.

“Even with help from the IMF, 2009 and 2010 will be difficult years due to the lingering effects of the world downturn. But the government’s policies should allow Romania to avoid the worst effects of the crisis and to emerge with an economy that is both leaner and more competitive”, said Franks.

IMF expects Romania’s economic growth to bounce back to positive values in 2011, when it projects a 5% advance of GDP, after two years of consumption contraction and increase in jobless rates.

In 2010, the jobless rate is expected to increase further in Romania, IMF seeing the rate at 9.7%, namely 880,000 unemployed.

For 2011, when analysts see a steep turnaround in sight, the average unemployment rate would fall to 7.7%, according to IMF projections.

Average currency exchange rate will stay in the range of 4.8 lei/euro in 2010 and 2011

International Monetary Fund sees an average currency exchange rate of nearly 4.4 lei/euro in 2009 and 4.8 lei/euro next year and in 2011.

In the press release remitted by IMF announcing that the executive board has approved the 12.9 billion stand-by arrangement for Romania, the institution enclosed an annex with the forecasts related to the evolution of Romanian economy over the next 2 years.

Gross domestic product is projected at 531.3 billion lei for 2009 (119.7 million euros), which corresponds to an average exchange rate of around 4.4 lei/euro. The year-to-date average rate stood at 4.25 lei/euro.

For 2010, the nominal GDP will equate 568.5 billion lei (118.8 billion euros), and an average exchange rate of around 4.8 lei/euro.

The projection for 2011 indicates a GDP of 634.1 billion lei or 130.7 billion euros and average exchange rate of 4.85 lei/euro.

Last week, National Prognosis Commission revised upward the outlook for this year average currency exchange rate, to 4.25 lei/euro from 4 lei/euro.

As for the public sector wages, they are expected to increase by 5.1% in 2009, a rate below the rise of prices, following that in 2010 and 2011 the consumer price index will stay flat.

Therefore, in 2009, the public sector wages will not keep inflation pace, the average growth of consumer price index being estimated at 5.9%, and within two years, the average growth of public sector wages will equal inflation. For 2010, IMF sees the annual inflation rate at 3.9%, and for 2011 at 3.5%.

In 2008, the public sector wages increased in average by 31%, after a 18.5% advance in 2007 and over 25% per year in 2005-2006. In 2009, however, the public sector wages are expected to climb 6.2%, by 3.8% next year, and by 5.7% in 2011, IMF says.

IMF’s required Romania to promptly address the country’s loose fiscal and income policies that contributed to the overheating of the economy which lifted budget deficit to 4.9%. IMF’s requirements include a reduction of the budget gap to 4.6% this year, to 3.6% in 2010 and to 2.7% of GDP in 2011.

Furthermore, by implementing prudent wage policies, Romanian authorities would place the price growth on a more sustainable path, in an effort to meet the inflation target after two years of missing it. Bringing inflation within the target range of National Bank of Romania is in fact one of the main program objectives of IMF, reads the press release.